IAG reinsurance bill tops $700m

The spate of natural disasters that struck Australia and New Zealand in 2011 has forced
Insurance Australia Group
to increase its reinsurance cover by $600 million for 2012.

The catastrophe reinsurance program will protect IAG for $4.7 billion of claims from customers this calendar year, compared to $4.1 billion in 2011, a rise of almost 15 per cent.

As the largest general insurer in Australia and New Zealand, IAG was hit hard last year by the Queensland cyclone and floods and the Christchurch earthquakes.

As a result, the wholesale insurance providers that cover IAG will charge IAG and its local competitors more for reinsurance.

IAG said it expects to report a total reinsurance expense of between $700 million and $720 million in the financial year ending on June 30, compared with $620 million the previous year.

IAG chief executive
Mike Wilkins
said the reinsurance program was an important part of the group’s capital management.

“In challenging market conditions, we are pleased to have concluded a program which provides us with increased coverage and the additional security of some multi-year protection," he said.

“While the overall cost of the program has risen, the outcome is consistent with the assumptions contained in the insurance margin guidance of 10 to 12 per cent provided by the group at the outset of the financial year."

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The 16 per cent rise in IAG’s reinsurance bill compares to the 20 per cent increase shouldered by Suncorp.

However, the estimates published by IAG yesterday exclude the recently announced $NZ380 million ($290 million) acquisition of the AMI insurance business in New Zealand, which remains subject to regulatory approval.

If acquired, the AMI business will initially carry specific reinsurance protection of up to $NZ1.4 billion.

Analysts have questioned whether the acquisition of AMI, which would boost IAG’s New Zealand share to 40 per cent, would mean higher future reinsurance costs for the group given, the reticence of some reinsurers to cover risk in the region. Mr Wilkins last month denied this would be the case and expressed confidence about the longer term outlook in New Zealand.

New Zealand’s February earthquake was rated the second-costliest insured catastrophe loss for 2011 by reinsurer SwissRe, incurring losses of $US12 billion and triggering rationalisation of the country’s insurance sector.

The Queensland floods rank as the seventh-most costly insured loss event last year, at $2.3 billion.

By mid-December, $4.3 billion was paid out in claims by insurers due to catastrophic events across Australia, excluding New Zealand.

Those included the Queensland floods ($2.4 billion), cyclone Yasi ($1.33 billion), severe storms in Victoria ($412.3 million) and floods in the same state ($122 million).

IAG’s modelling indicates a 15 per cent lift in the frequency of highly destructive cyclones and a doubling in frequency of severe hailstorms in the next four decades.

Reinsurers are taking a more conservative approach to pricing in the Asia-Pacific region after the Queensland floods, the Christchurch earthquakes and Japanese tsunami.

The world’s largest reinsurer, Munich Re, said that 80 per cent of all economic losses from natural disasters in the first nine months of this calendar year were in the Asia­Pacific, incurring about $US52 billion of insured losses.

Global economic losses from natural disasters were $US310 billion for the first nine months, making it the costliest year on record for insurers.

The IAG reinsurance program includes cover for flood, which is being introduced across Australia by IAG’s business CGU, and extended into Queensland and Victoria by Australia Direct, early this year.

In the case of the next natural disaster in 2012, IAG will need to stump up $150 million if the event occurs in Australia, $130 million for New Zealand and $50 million for the UK.

Meanwhile, IAG also advised yesterday that its Victorian businesses, which distribute insurance predominantly under the RACV Insurance and CGU brands, had so far received about 20,000 claims following the hailstorms and related severe weather which occurred in the state around Christmas.

Most of the claims relate to vehicle damage caused by hail, while there was also some damage to homes and other buildings. Mr Wilkins said it was too early to provide an estimate of the group’s total claim cost related to the severe weather in Victoria.

The Insurance Council of Australia estimates the industry has received more than 30,000 claims and estimated insurance losses at more than $100 million.

Since December 23, the Canterbury region of New Zealand has suffered earthquakes and aftershocks, but based on early claims activity, IAG does not currently expect this to be a material claims event.